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Many of the strategies that China has instituted in pursuit of its “indigenous innovation” policy “violate the spirit and the letter of the WTO,” Sen. Jeff Merkley (D-Ore.) said Feb. 28.

Merkley was speaking in Washington, D.C. at an event sponsored by the nonprofit Information Technology & Innovation Foundation. The event corresponded with the release of a new ITIF report, Enough is Enough: Confronting Chinese Innovation Mercantilism.

The report's author, ITIF Founder Robert D. Atkinson, argued that through its indigenous innovation policy, which was launched in 2006, China “fundamentally wants to gain absolute advantage, not just competitive advantage.”

China has it sights on being the global leader in “every industry,” Atkinson said, “especially [with regards to] advanced technology products and services.”

China's Policies Date Back to 2006

Atkinson argued that China's shift from an economy that was looking to attract foreign direct investment to its current indigenous innovation policy was articulated in a 2006 paper titled Guidelines for the Implementation of the National Medium-and-Long-Term Program for Science and Technology Development (2006-2020). In his report, Atkinson said that the paper “represented a major shift in direction for Chinese economic policy, calling upon China to seek the capability, through Chinese-owned firms, to master a much wider range of advanced industrial technologies.”

In order to achieve these goals, China has engaged in currency manipulation, which has had the effect of drastically increasing exports while at the same time reducing imports, the report stated. Further, China levies much higher tariffs than other WTO countries, the report said, thus making it even more difficult for foreign firms to compete with Chinese products on a domestic level.

Impact on Intellectual Property Rights

China also has instituted a number of measures that are detrimental for U.S. intellectual property owners, Atkinson said.

One such policy is the requirement that foreign firms wishing to do business in China partner up with a domestic firm, thereby relinquishing control to the often state-controlled Chinese firm. “These coerced agreements are designed in part to keep profits in China and … to allow Chinese firms to learn from the foreign firms so that they can later compete independently against them,” the report stated.

Indeed, Atkinson said that many joint-venture agreements require the foreign firm to open an R&D facility in China. Atkinson said that these “forced disclosure of know-how” requirements are often implicit since they technically violate China's WTO accession agreement.

Atkinson also noted that China's anemic IP enforcement record should give foreign businesses pause. He said that piracy was so embedded in Chinese culture that a recent report found that 80 percent of the Chinese government's computers operate using counterfeit versions of Microsoft's Windows product.

“China has signed TRIPS, but they turn a blind eye to IP theft,” Atkinson said, alluding to WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights. Atkinson added that the recent study concerning the pirated version of Windows “demonstrates that intellectual property theft is a problem that [China] doesn't take seriously.”

‘Weak' Patent System

Another significant problem foreign firms face is the recent explosion of the issuance of Chinese design and utility model patents, which Atkinson called “junk patents.” These patent applications are not examined, and grant the applicant to 10-years of protection.

Atkinson said a recent study suggested that utility model patents constitute the vast majority of patents being issued in China, and that most of these patents are being issued to Chinese firms. He added that the same study suggested that as many as 50 percent of these patents are being issued in order to fuel litigation.

“This weak patent system makes it easy for Chinese firms to countersue in response to infringement suits by foreign competitors,” the report said.

As an example Atkinson pointed to the 2009 dispute between a Chinese firm Zhengtai and the French electronic firm Schneider Electric. Schneider was initially successful in its patent infringement lawsuits against Zhengtai in Germany and Italy. However, Zhengtai subsequently got a utility model patent regarding a miniature circuit breaker and then sued Schneider for infringement in China. Zhengtai won a large settlement in the Chinese court.

“Many saw the Schneider case as message: Don't fight us on patents because we will reciprocate in our courts,” Atkinson said.

How to Combat ‘Mercantilism?'

Merkley said that there was no legislation on the horizon that he was aware of that would immediately engage the issue of China's policies. However, he noted that the President Obama in his recent State of the Union Address called for the creation of a Trade Enforcement Unit. The proposed Enforcement Unit, and the release of ITIF's report are steps in the right direction, Merkley said, because they keep the issue alive and “raise the conversation to a new level.”

Atkinson said that the best approach is to “contain and roll back Chinese mercantilism,” adding htat “stronger actions need to be taken under existing authorities” such as the U.S. Trade Representative and the WTO.

However, Morgan Reed, the executive director of the Association for Competitive Technology, said that the problem could not be addressed unilaterally. The key, Morgan said, is for American firms, and the U.S. government, to understand what China wants and to work collectively to achieve results that suit all of the actors.

“We need to disabuse ourselves of any notion that we have the ability to tell China how to do their business in this current world,” Reed said. “They beat us in arm wrestling, so to speak, and they are looking at us asking: ‘What do you bring to the table?' ”

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